“At the same time, we affirmed our ‘B’ short-term rating on the bank.

“The merger of BMI bank with Al Salam Bank-Bahrain B.S.C. was concluded on March 31, 2014, in a “business combination” transaction where Al Salam Bank issued new shares to existing shareholders of BMI Bank to acquire 100 per cent of the bank.

“BMI Bank is now a fully owned subsidiary of Al Salam Bank, which had a total consolidated asset base of $5 billion and a capital base of $308 million as of March 31, 2014. The combination of the two banks represents the second-largest Islamic bank in the Kingdom of Bahrain.

“Although, we believe BMI Bank’s business and financial profiles could eventually benefit from being part of a larger entity in Bahrain–one that has stronger capitalization and better asset quality–we think that the key challenges for BMI Bank as a stand-alone entity have not materially changed. Therefore, we have not changed the bank’s stand-alone credit profile (SACP), which we assess at ‘b+’.

“We understand that BMI Bank will continue to operate as a separate entity, under its own brand name, over the next two to three years. This is for regulatory purposes, as the bank will need to convert to an Islamic bank. However, we also understand that BMI Bank’s systems and policies have already been integrated into Al Salam Bank’s structure. Both entities are closely managed and supervised by a joint management committee, and they collaborate on key business development activities and use each other’s distribution channels.

“We project that the two banks will become fully integrated. Therefore, we consider BMI Bank to have a “core” status within Al Salam Bank. We assessed the group credit profile (GCP) of the group at ‘bb’. This translates into two notches of uplift for expected group support for BMI Bank above its SACP.

“The stable outlook reflects our expectation that BMI Bank’s business and financial profiles will remain relatively unchanged over the next 12 months.

“Although it is not our base case, we could revise down our assessment of group support from Al Salam Bank if we observe a structural change in the perceived relationship and importance of BMI Bank to its parent. This would prompt us to lower the ratings on BMI Bank. In addition, if we were to see a visible deterioration in the financial profile or performance of the combined entities, we could lower our GCP and ratings on BMI Bank.

An upgrade appears relatively remote at this stage. Although we believe the recently completed merger might generate some benefits to both banks–such as a stronger franchise, enhanced revenue generation, and cost optimisation- we believe it will take some time before these benefits become visible, and not over our outlook horizon for the next 12 months.